Dec 5, 2008

Business - Nokia sees cellphone sales shrinking faster

Sales of mobile phones are shrinking faster than expected as consumers are cutting spending, the world's top cellphone maker Nokia said on Thursday in its second warning in three weeks.

"Consumers are continuing dramatically to cut back their spending," Nokia Chief Financial Officer Rick Simonson said at the company's investor day in New York, adding that he was under "no illusions" that the market would recover any time soon. "We're facing it across the world. What's recently accelerated is the slowdown in emerging markets," he said.

Nokia said handset market volumes are expected to fall by at least 5 percent next year, something many analysts were already expecting. But it sees its market share rising, helping to lift its stock 4 percent to 11.02 euros in Europe. Nokia's U.S. shares were up 54 cents or 4 percent at $13.84 on the New York Stock Exchange in afternoon trading.

Some analysts are worried, however, that handset sales could fall a lot further next year, as even Nokia acknowledged that it does not have very good visibility of the market for 2009.

"We're surprised they didn't cut (its forecast) more for 2009," said Charter Equity Research analyst Ed Snyder. "I don't think we'll see February 1 without another cut."

Nokia said it does not plan to give any more financial updates or estimates until it reports earnings in January.

It said that its key devices and services unit operating profit margin should be 13-19 percent next year, with the help of the cost-cutting to which it alluded throughout the analyst day.

"This would obviously be good news if met; investors have started to prepare for worse," said analyst Tero Kuittinen from Global Crown Capital.

In addition to ailing consumer demand, operator and retail distributors will go through a period of destocking, resulting in lower sales volumes of manufacturers than purchase volumes by consumers in the first half of 2009, Nokia said.

TOUGHEST YEAR AHEAD

The cellphone market has grown at well over 10 percent for years, having dipped only in 2001, amid that year's economic downturn; but it will face a new challenge next year.

"Next year will be the most challenging year the mobile industry has ever faced," said Ben Wood, research director at CCS Insight.

But Nokia said it was in a good position to weather the downturn because of the large scale of its global business.

"2009 will be challenging for our industry; however we have a strong, enviable base to build on, and I believe we will continue to strengthen our position on many fronts," Nokia Chief Executive Olli-Pekka Kallasvuo said in a statement.

"Building on our operational flexibility, Nokia is acting to reduce costs appropriately in the current slowing environment," he said.

But the company said that in the meantime fourth quarter earnings will suffer, as it has not been able to cut costs quickly enough in response to the rapid deterioration of the handset market in the last few weeks.

Analysts expect Nokia to fare better than its smaller rivals in the downturn.

"Despite the challenging environment, Nokia remains best positioned ... thanks to their economies of scale and channel strategy," said Gartner analyst Carolina Milanesi.

Nokia cut its forecast a day after the world's fifth and sixth largest handset makers, LG Electronics Inc and Research in Motion Ltd, warned on sales and profit growth.

"The smaller handset manufacturers in general have it more difficult -- Motorola, Sony Ericsson and smaller players -- and it is not surprising that Nokia sees its market share increasing," said Michael Schroder, head of research at FIM in Helsinki.

"If the weakness continues past summer, it is probable that some would get out of the business," he said.

Motorola Inc and Sony Ericsson, a venture of Japan's Sony Corp and Sweden's Ericsson, are already struggling to make a profit.

Nokia said it expects also to win back market share in smartphones, where it has lost ground to RIM and Apple Inc. Simonson said that the smartphone market should grow in 2009, but he did not give a specific estimate.

Nokia also lowered its forecast for the 2009 telecommunications network equipment market, saying it would fall in euro terms 5 percent or more. Shares in the world's largest mobile telecom equipment maker Ericsson closed 1 percent lower on the news.